MONGOLIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (MEITI)

Transcription

1 HART NURSE LTD Chartered Accountants ULAANBAATAR AUDIT CORPORATION MONGOLIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (MEITI) Mongolia Third EITI Reconciliation Report 2008 Ulaanbaatar city June 2010

2 The Report and all appendices relating to the report are intended for the use of the Multi-Stakeholder Working Group and National Council of the MEITI for the purpose of that initiative and are not to be relied upon by other parties 1 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

3 CONTENTS Abbreviations and Definitions INTRODUCTION Objective Scope of work Limitations/Nature of exercise Participants in the EITI Reconciliation Structure of the report Acknowledgement EXECUTIVE SUMMARY Financial flows Initial flows Adjusted flows Central government ministries and agencies Local government Material receipts Costs disbursed for protection of the environment Information based on audited financial statements Field visits to Selenge and Darkhan-Uul aimags OVERVIEW OF EXTRACTIVE SECTOR IN MONGOLIA Minerals Coal Oil APPROACH Basis of the exercise and materiality Audit approach and methodology Interrelations of the work flow Methodology Stakeholders participation chart Covered Companies RECONCILIATION OF FINANCIAL FLOWS Aggregated financial flows reported initially Aggregated financial flows after reconciliation and adjustment UNRESOLVED DIFFERENCES Aggregated unresolved Taxes Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

4 6.3 Fees Charges and service charges Dividends on state and local property Other payments to recipient government Donations to governmental organisations Expenditure for environmental protection PAYMENTS TO LOCAL GOVERNMENT (aimags and soums) Reason for occurring on monetary donations Field trip to some soums and aimags Common weaknesses ISSUES Delays in preparation of the template Expenditure incurred in relation to environmental protection Licence fee for exploitation and exploration of mineral resources Incomplete government data Charges and service charges Accounting personnel s skills and ability Difficulty in communication RECOMMENDATIONS The EITI process and its execution should be formalised The MEITI Working Group should review the revenues and payments to be included in EITI reporting The MEITI Working Group should determine an acceptable margin of error for any discrepancy between payments reported by companies and revenues reported by government Unresolved discrepancies should be examined Communication to Covered Entities and training of their staff requires improvement Systems and supporting information at a number of government agencies require improvement Other recommendations APPENDICES Appendix A Adjustments resulting from the reconciliation exercise by financial flow Appendix B Adjustments resulting from the reconciliation exercise by company Appendix C Source of information Government Entities Appendix D List of Companies Appendix E Letters of Representation from companies Appendix F List of people we met Appendix G Covered Entities Appendix H Covered entities contact information Appendix I Schedule of initial Appendix J Schedule of net adjustments resulting from the reconciliation Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

5 Appendix K Schedule of unresolved Appendix L Donations, assistance provided by the companies (per detailed reports of Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

6 Abbreviations and Definitions BGD Bayangol district Business economic entity Legal business entity, such as company, corporation and others Business Economic entity income tax /CIT/ Business Economic Entity Income tax per Mongolian law term, or Corporate Income tax BZD Bayanzurkh district CHD Chingeltei district ED Environment Department EITI Extractive Industries Transparency Initiative ERD Environmental Resource Department FED Finance and Economic Department GO Governor s Office Government Government of Mongolia IFAC International Federation of Accountants JSC Joint Stock Company LG Local government Limited Liability Company LWSA Labor and Social Welfare Agency MCO Mongolian Customs Office MEITI Mongolia Extractive Industries Transparency Initiative MEITIS Mongolia Extractive Industries Transparency Initiative Secretariat MMRE Ministry of Mineral Resources and Energy MNCCI Mongolian National Chamber of Commerce and Industry MNMА Mongolian National Mining Association MNT Mongolia Tugrug MOET Ministry of Environment and Tourism Mongolia MOF Ministry of Finance of Mongolia MONICPA Mongolian Institute of Certified Public Accountants MRAM Mineral Resources Authority of Mongolia MSWG Multi -Stakeholder Working Group MTA Mongolian Tax Authority NC National Council NSAM National Statistical Authority of Mongolia PAM Petroleum Authority of Mongolia PIT Personal Income Tax RMC Representative meeting of citizens SBD Sukhbaatar district SKHD Songinokhairkhan district SPC State Property Committee of Mongolia SRD State receipt department USD United States Dollars VAT Value Added Tax 5 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

7 Hart Nurse Ltd Chartered Accountants The Old Coach House Southern Road Thame, Oxfordshire OX9 2ED England Tel: Fax: Website: Ulaanbaatar Audit Corporation 4 th Floor, Margad Centre Building, 5 th Khoroo, Chingeltei district, Ikh toiruu, Ulaanbaatar city, Mongolia Tel: , , Fax: Website: Multi-Stakeholder Working Group of the Mongolia Extractive Industries Transparency Initiative c/o Mongolia EITI Secretariat Tuushin Building Room 512 Ulaanbaatar a Mongolia 10 June 2010 Hart Nurse Limited and Ulaanbaatar Audit Corporation have been appointed by the Mongolia Extractive Industries Transparency Initiative Secretariat to undertake the 3 rd EITI Reconciliation for Mongolia for 2008 and to prepare a Report on this Reconciliation ( Engagement ). The Engagement was undertaken in accordance with the International Standard on Related Services applicable to agreed-upon procedures engagements. The procedures performed were those set out in the Terms of Reference appended to this report, except where stated otherwise in this report including its appendices. We set out our findings in report including its appendices. Because the procedures were not designed to constitute an audit or review made in accordance with International Standards on Auditing or International Standards on Review Engagements, we do not express any assurance on the transactions beyond the explicit statements set out in this report. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. Our report is solely for the purpose of informing the Multi-Stakeholder Working Group and National Council on the matters set out in the terms of reference and is not addressed to any other party or to be used for any other purpose. This report relates only to the subject matter specifically set out herein and does not extend to any financial statements of any entity taken as a whole. Hart Nurse Limited Chartered Accountants Ulaanbaatar Audit Corporation 6 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

8 1. INTRODUCTION This is the final report under the Mongolia 3 rd EITI Reconciliation for the year The report is intended for the use of the Mongolia EITI National Council and Multi-Stakeholder Working Group for the purpose of that initiative and is not to be relied upon by other parties. The report comprises: Volume I - Report Volume II Appendices 1.1. Objective The objective of the Engagement is to ensure, in compliance with the procedures set out by the international EITI Secretariat, the transparency and credibility of mining sector payments and receipts in Mongolia. To this end, the Engagement entails an analysis and reconciliation of material payments and receipts made in the fiscal year 2008 in the mining sector Scope of work Hart Group and UB Audit ( the Consultants ) were required to undertake the work set out in the Terms of Reference for the Engagement Limitations/Nature of exercise Unless noted in out report, the reconciliation has been carried out on a cash accounting basis, with both cash and in-kind payments taken into account. If there are material receipts or payments omitted from the reporting templates, our work would not be sufficient to detect them. Any such receipts or payments which were omitted would not therefore be included in our report. In conducting our work, we have relied upon the information and explanations obtained from Covered Entities. No representation is made as to the accuracy or completeness of such information. This report is prepared both in English and Mongolian. If there should be any or contradictions between the English version and the Mongolian version, the English version will prevail. Our report incorporates information received up to 27 th May 2010, which is the deadline set by the MTA following a review of our initial draft report by the Multi-Stakeholder Working Group of MEITI. Any information received after this date is not, therefore, included in our report Participants in the EITI Reconciliation Templates for information from central government departments were provided by the Ministry of Finance. The central government departments participating in the 2008 EITI reconciliation are:- Ministry of Finance Tax Authority Ministry of Environment and Tourism Mineral Resources Authority Petroleum Authority Customs Office Labour and Social Welfare Service Agency and State Property Committee. 7 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

9 In addition, governors of capital, aimags, districts and soums have provided information. A full list of the Covered Entities is included at Appendix G. 46 companies with payments in excess of MNT 100 billion have been included in the exercise. A full list of the Covered Companies is included at Appendix D Structure of the report The report contains:- a. An Executive Summary b. A brief overview of the extractive sector in Mongolia c. Our approach to undertaking the Engagement d. An aggregation of the flows (payments and receipts) reported i. Initially to the MEITIS ii. After excluding items not included in the scope of the exercise iii. After reconciliation of the initial, to the extent this was possible based upon the information and explanations provided by Covered Entities e. Unresolved, with information about the type of receipt/payment involved and the Covered Entities whose reported figures remain un-reconciled. f. A discussion on payments to aimags and soums, including the results of field trips g. A summary of issues arising during the Engagement h. Recommendations for improvements in transparency and EITI processes Full details of initial, adjustments made and unresolved, analysed by company and by type of financial flow, are contained in Appendices, together with other supporting information Acknowledgement The Consultants would like to express our sincere thanks to team of the MEITIS, Mr. Tsolmon Sh, and Mrs. Khurelchimeg T., for supporting and assisting us with organisation of meetings with major officials from the government and its various organisations and agencies, as well as with mining companies; and for sending and receiving official confirmation letters to/from these parties. Also to Mrs. Dolgor B, Head of Working Group and Senior Adviser of Prime Minister, and Mr. Sumya E., Secretary of Working Group and Principal Officer of the Government of Mongolia, in particular, who have been instrumental assisting us in receiving timely replies from the government and as well as from the local governments. 8 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

10 2. EXECUTIVE SUMMARY In this section, we summarise the main findings from the exercise to reconcile the receipts declared by the government from extractive companies included in the 2008 EITI reconciliation with the payments to government reported by those companies Financial flows The table below shows: i. The aggregate flows reported by Covered Entities initially, and the between receipts reported by government and payments reported by companies ii. Adjustments made as a result of our reconciliation work iii. The adjusted aggregate flows and the which could not be resolved Taxes, fees, charges payed from companies to local government Government Company Initial MNT 000 Adjustment Adjusted Unresolved Government Company Government Company MNT 000 Taxes 513,176, ,354,346 (16,177,571) 821,835 (15,428,524) 513,998, ,925,821 72,788 Fees 117,144, ,715,936 (1,571,212) (11,678,010) (13,172,267) 105,466, ,543,670 (76,955) Charges and Service Charges 2,434,776 2,918,513 (483,737) 52,050 (74,897) 2,486,826 2,843,616 (356,790) Dividends on state and local property 27,349,905 21,133,422 6,216,483-6,216,483 27,349,905 27,349,905 - Other payments to recipient government - 26,669,948 (26,669,948) 26,669,948-26,669,948 26,669,948 - Donations to governmental organisations 1,048,225 10,364,538 (9,316,313) 4,893,179 (4,353,078) 5,941,404 6,011,460 (70,056) Costs disbursed for the protection of the environment 4,580,546 3,727, ,428 (1,540,781) (17,960) 3,039,765 3,709,159 (669,394) Total 665,734, ,883,821 (47,148,870) 19,218,221 (26,830,242) 684,953, ,053,578 (1,100,407) Costs disbursed for the protection of the environment do not represent flows paid to the government and it became clear to us during our reconciliation that relating to these costs cannot, therefore, be adjusted. Excluding costs disbursed for the protection of the environment, total unresolved are: Section Unresolved Differences MNT 000 Adjustments made Unresolved Differences MNT 000 Taxes 72,789 72,789 Fees (76,956) (76,956) Charge, service charges (356,790) (356,790) Dividends on state and local property - - Other payments to recipient governments - - Donations to Governmental organisations (70,056) (70,056) Costs disbursed for protection of the environment (669,394) 679,511 10,117 Total (1,100,407) 679,511 (420,896) The unresolved difference of MNT1.1 billion are explained in this Report and Appendices and we set out which companies spent costs for the protection of the environment and how have occurred. See Section 8.2 for comment on costs disbursed for the protection of the environment; and Section 9.2 (d) for recommendations on this area. 9 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

11 2.2. Initial flows The templates submitted to MEITIS contained a number of obvious errors in completion or omissions, which arose due to a combination of i. inadequate understanding of the requirements, by government departments and companies ii. inadequate care over completion of the templates, particularly by MTA iii. failure to provide data requested, especially from aimags and soums 2.3. Adjusted flows After our reconciliation work, there remain discrepancies totalling MNT 1.1 billion which could not be resolved with the parties reporting the different figures. These discrepancies represent 0.16% of total flows to the government. This figure is not material in the context of the EITI exercise but the Working Group should consider whether they wish to investigate them further. The unresolved discrepancies arise almost entirely from lower reporting of receipts by local government, specifically on Service charges paid to state and local administration in accordance with relevant law (MNT 357 million) and Costs disbursed for protection of the environment (MNT 680 million) Central government ministries and agencies LWSA and MCO were slow to provide information and required much follow up work by our staff. Communication of information between ministries and government agencies needs to be improved. Government figures were often mis-reported because of this. Communication between local offices of the MTA and the central functions also requires improvement. The systems and processes at MTA require review and improvement. A number of adjustments were made to the initial information provided by the MTA from which it is evident that this initial information was not correctly prepared. By way of example, the MTA reported receipts of MNT 7.35 billion for royalties from one company, which was MNT 3.38 billion lower than was reported by the company. The MTA eventually provided detailed reports showing receipts of MNT billion, which was the figure declared by the company. The MTA has been unable to justify its original submission or the reason for the delay in producing the revised information Local government Obtaining information from officials in the aimags and soums proved difficult as in previous years, in particular concerning donations, where the figure initially reported of MNT 1.0 billion was increased by MNT 4.9 billion as a result of the reconciliation. There were two major changes and numerous smaller changes to local government templates. I. MNT 3.4 billion was added to government figures after comparison with the initially reported figures of Chin Hua MAK nariin sukhait. The company provided detailed information confirming their initial reported figures for maintenance for Culture Centres of Gurvan tes soum of Umnugobi aimag and monetary donations for road construction work to the border point of Shivee huren. We sent letters to Governor of Umnugobi requesting confirmation of the amount reported by the company. The Culture Centre of Gurvan tes soum confirmed the donations while Mr.Otgonbayar, Development policy 10 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

12 II. department office of Aimag administration, commented that donations for road construction work to Border point expenditures and the terms of road completion provided are unclear. Donations of MNT 1.0 billion were reported by the company as provided to the Sustainable Development Fund of Mandal, Bayangol, and Tukhel soum of Selenge aimag. The Government initially did not report any amount. When our team member visited these soums, they saw in the local accounting records that the 1.0 billion was recorded There is a need to examine the reporting systems and processes for recording and controlling expenditure and receipts at aimag and soum level so that government can be sure income is appropriately recorded, that expenditure is properly disbursed and is controlled within budgetary levels. We also note that the figures from the aimags and soums are consolidated by MOF, which provides no support for the consolidation, making it impossible to see whether reporting deficiencies have arisen at local government level or within MOF Material receipts The Working Group has determined which government receipts are material for the 2008 reconciliation and included them in the templates circulated to Covered Entities for completion. Our work has been carried out within this approved definition. The scope of the reconciliation requires review for the future because we believe material receipts may have been omitted, while other receipts currently included are not flows between extractive companies and government, and other receipts currently included are not financially material. i. Sub contractors Many of the operating mining companies sub-contract part of their operations to other companies. Payments from these sub-contracting companies, if made by the operating mining companies, would be disclosed on the templates. We recommend that payments from these sub contractors should be included within the scope of future reconciliations if they are ascertained to be material. ii. Donations The donations reported by companies did not represent, in many cases, payments to government; rather, they were costs which the company incurred voluntarily and has designated as being for the benefit of the community (e.g. construction of a road). We recommend that costs not paid to government should be excluded from the EITI template and reconciliation and shown under Section 2 of the EITI template. We further recommend that the Working Group should consider a minimum individual value for reporting donations to government iii. Charges and service charges Total receipts reported by government for charges and service charges in 2008 amounted to MNT 2.5 billion, out of total adjusted receipts of MNT 685 billion. These charges, then, represent only 0.36% of total government receipts captured under the current EITI exercise. We recommend that the Working Group should consider whether they should be included since they are not a financially material receipt from the extractive sector Costs disbursed for protection of the environment These costs are reported by companies but are not paid to government bodies; rather they are paid to local contractors for various works. This means that any reconciliation would be between a. costs declared by the company to MOF and the EITI reconciler; and b. figures which the government declares based upon returns the company itself has made, and not as actual receipts to the government 11 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

13 This is not an independent reconciliation. We recommend that such costs are included as voluntary disclosures in Section 2 of the EITI template rather than as costs which require reconciliation. Two thirds of the unresolved discrepancies relate to these costs. We noted the report submitted to MOET notifying MOET of expenditure incurred is prepared by technical personnel, apparently without reference to company financial staff. The costs reported, therefore, do not appear to be substantiated by reference to expenditure records within the company. This requires further investigation by MOET, since these reports are the key control over environmental expenditure which the company is required to carry out Information based on audited financial statements In addition to our terms of reference, when we found that Template #1 had not been checked by the company s auditors, we asked each company to confirm the status of the information by means of a letter addressed to us from its Board of Directors. 18 of the 46 companies replied, while 28 companies have not replied. Details are included in Appendix E Field visits to Selenge and Darkhan-Uul aimags In view of the difficulties experienced in obtaining information from local governments, we carried out field visits to two aimags, six soums and thirty-five local organisations of eight companies to test the processes first hand. The results of these visits are set out in Section Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

14 3. OVERVIEW OF EXTRACTIVE SECTOR IN MONGOLIA Mongolia has rich natural resources, principally gold, copper, coal, and rare earth minerals. The country s gold and copper reserves are believed to be among the largest in the world. Today the mining sector of Mongolia generates 75% of the total export income of Mongolia and provides almost 42 thousand people (4% of the total working capital) with working places. The contribution of the extractive industries sector to the economy is as follows: Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Gross domestic production /GDP/ 17.3% 18,0% 30.0% 27,5 % 28.2% Industrial production 64.7% 65,5% 68,4% 67.8% 64.3% Export production 70.80% 75.8% 76,0% 68,8% 80.7% Source: Mongolian Statistical Office In addition to mining, oil exploration activities are also being undertaken, with some production now starting (see below) Minerals Mongolia produces gold, copper, coal, fluorspar, zinc, iron ore, tungsten, and exports nearly all its produced copper concentrate, molybdenum, coal and zinc to China, fluorspar to Russia, the United States, Ukraine, gold to Canada, the United States, United Kingdom, and China. The Ministry Resources Authority of Mongolia (MRAM) publishes the following summaries of resource availability and exploitation: 13 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

15 In 2008, about 75% of Mongolia s total export revenue was derived from mineral commodities. Of that percentage, copper accounted for 33%; gold, 24%; coal, 7%; petroleum, 4%; and zinc, 6%. Mongolia received 66% of its total export revenue from China, followed by Europe, 17%; the United States and Canada, 11%; Russia, 3%; and the remainder, from other countries (Mineral Resources Authority of Mongolia, 2009; World Bank, 2009b). MRAM also summarises the financial contribution of the sector to the national economy: 14 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

16 3.2. Coal Coal deposits are largest in the east but are spread throughout the country:- Production has increased over recent years, and with domestic consumption remaining relatively static, exports primarily to China have increased significantly Oil (Information from MRAM website) Mongolia s sedimentary basins were divided into 25 exploration blocks for international bidding, and the Petroleum Authority of Mongolia was working to add four more. Exploration blocks were located mostly in the southern half of the country in central, eastern, and western Mongolia. The East Gobi sedimentary basin encompassed four petroleum sub-basins in east-central Mongolia. The Zuun Bayan basin was discovered in 1941 when there was intensive exploration and extraction. The Tamsag basin was discovered in eastern Mongolia in the 1990s and a 2001 Chinese National Oil Corp. survey of the basin estimated its reserves to be 1.5 billion bbl. In recent years, other fields have been explored and exploited, including the Tasagaan Els basin and some basins in western Mongolia. Exploration activities 15 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

17 from 1994 to 2008 included 17,600 km of two-dimensional seismic work, 6,000 km of three-dimensional seismic work, the drilling of 448 wells, and foreign direct investment of $952 million1. In 2008, petroleum exploration and production activities were being conducted by one Canadian company (Shaman Resources, ); three Chinese companies (Petro China Daching Tamsag-Mongolia, Dong Sheng Petroleum, and China Golden Sea, ); and one Mongolian company (Petro Matad ). The Toson-Uul and PSC-97 Blocks were production blocks with 50 and 31 producing wells, respectively. The Toson-Uul Block produced 3,800 bbl/day and the PSC-97 Block produced 1,800 bbl/day, and together, the blocks have produced, cumulatively, about 3.4 Mbbl (of which 3.1 Mbbl was exported because the country does not have a refinery to process the petroleum). The country reported that, by 2010, Petro China Daching Tamsag-Mongolia would produce about 3 million barrels per year (Mbbl/yr) and that, by 2015, that number would reach 11.3 Mbbl/yr2. 1 Prost, 2004; Amarsaihan, 2009; Petroleum Authority of Mongolia, Amarsaihan, 2009; Petroleum Authority of Mongolia, Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

18 4. APPROACH 4.1. Basis of the exercise and materiality The MOF issued a report for 2008 covering 184 companies operating in the extractive industries sector, showing receipts by the government from these companies under the headings used in the templates approved by the MSWG for use in the 2008 EITI reconciliation. The Government Departments, aimags, soums and other government agencies/organisations included in this exercise are the Government Entities : they are listed in Appendix G. Under instructions from the MSWG, the MOF requested all companies where government receipts were shown to exceed MNT 100 million to complete a template, showing the payments made in There were 46 companies where the government reported receipts in excess of MNT 100 million for 2008 and these are the Covered Companies. They are listed in Appendix G. The MOF schedules comparing the receipts declared by the government with the payments declared by the 46 companies formed the basis for the reconciliation exercise. The MSWG has issued no guidance on materiality in respect of discrepancies between reported payments and receipts. On 14 th May 2010, we presented a draft report to the MSWG, showing the discrepancies remaining unresolved. Following this meeting, at the request of the MSWG, the MTA wrote to 27 of the companies requesting that they provide further information by 25 th May 2010 to explain the unresolved discrepancies between the figures they had reported and the figures reported by the government. This report takes account of all replies received up to 27th May Audit approach and methodology The approach we have adopted is summarised below: Gained a thorough understanding of the EITI procedures established for Mongolia through discussions with the EITI Mongolia Secretariat and review of relevant documents, including in particular the accounting principles and treatments established for the reporting templates and the margin of error that has been established. Prepared schedules incorporating the information reported by Covered Entities and adjusted these returns to remove items which were incorrectly included (e.g. tax penalties and fines) or mis-stated (e.g. reported in MNT rather than MNT000 as required) Carried out reconciliation procedures with a view to resolving reported discrepancies. Liaised with both Company and Government Departments to resolve discrepancies. Explained all the adjustments made during the reconciliation. Provided EITI Mongolia with copies of detailed work sheets for each company supporting aggregated figures in report. 17 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

19 4.3. Interrelations of the work flow Template #1 No Match Discrepancy Template #3 Yes Classification Communicate with EITI Check Template #2 Discrepancy Yes Verification with company No Resolved? Communicate with relevant government organisation Resolved? Report Yes No Classify & methodology Application Initial report: Unresolved discrepancy Unresolved discrepancies by items Net adjustment to company and government reports 18 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

20 4.4. Methodology Data has been reported by companies on EITI Mongolia Template 1. Upon enquiring, we found that this Template (#1) had not been checked by the Company s auditors. Accordingly, we asked each company to confirm the status of the information by means of a letter addressed to us from its Board of Directors. Details of the replies received are included in Appendix E. Template 1 is divided into 2 sections namely: Scope 1: Scope 1 consists of 2 main parts and the first part was stated cost of goods and sales amounts both in unit and currency monetary unit of mining companies. The Second part included taxes, fees, Dividends on state and local property, other payments to recipient Government, Donation to Governmental organisations, Costs disbursed for environment protection, paid by foreign and domestic companies to state and local budget, and Scope 2: Revenues and profit flow (voluntary basis) Excel spreadsheets were used to match taxes and fees paid by companies to government and local budget recorded for each Indicator on the template supplied by each company (EITI Template 1) with those recorded on each company s consolidated report prepared by government organisations (EITI Templates 2&3). All discrepancies arising were tabulated and The compilation of the consolidated figure(s) on EITI Template #3 was checked from information provided on EITI Templates #2 by each Government organisation and Taxation authority. Detailed reconciliations were requested as necessary from relevant Government Organisations and Taxation Authorities (detailing the dates and amounts of receipts making up the amount disclosed on Template 2) and used to match with reconciliations of payments made by companies in order to identify the details of, and where possible explain, the discrepancy as detailed below, After considering the number, size and type (indicator) of the discrepancies that have occurred for a particular company, we:- Reviewed the validity of data contained in MEITIS Template #1.Depending on the nature of the item, this involved checking from source documents, analytical review or independent confirmation. Requested the relevant Company to provide a copy of their reconciliation (workings detailing the payment dates and amounts) supporting the calculation of the payment figures they have included on EITI Template #1. Where this procedure has not satisfactorily explained a discrepancy, we reverted to the review process outlined above. Where the process did not resolve the manner in which the discrepancy(s) should be corrected, joint meetings have been held with the company and relevant government organisation to agree a solution. Discrepancies identified by the matching process have been classified by type / nature once the reasons for the discrepancy(s) have been identified (or if necessary as unresolved) in order to highlight any common issues which occurred in the preparation of the Templates and the EITI process. 19 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

21 4.5. Stakeholders participation chart Government of Mongolia EITI Mongolia Hart Nurse & Ulaanbaatar Audit Ministry of Finance Tax Authority Ministry of Environment and Tourism Mineral Resources Authority Petroleum Authority Customs Office Labour and Social Welfare Agency State Property Committee EITI Secretariat Mongolia Templates #1, 2, 3 Christopher Hart Nurse David Laurence Quinn Osorgarav Buukhuu Erdenetsog Natsagdorj Mendbayar Bazarzagd Nominchuluun Chuluunbor Saizmaa Laagan Bat-Orshikh Baatarkhuu EITI - RECONCILIATION REPORT Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

22 TAXES Corporate income tax Windfall tax Real estate tax Tax on automobile and self-moving vehicles Customs tax Excise tax on imported fuel and oil materials Tax on petrol and diesel fuel State Budget Local Budget MTA C o m p a n i e s CHARGES DIVIDENDS FEES DONATIONS EXPENDITURES Stamp and other charges Custom service fee Dividends on state property Dividends on local property 50% contribution in kind to environmental protection MCO Note 1 the fee for exploitation of mineral resources is credited as to State Budget 70% and Local Budgets 30% Fee for exploitation of mineral resources (note 1) Land rent Fee for water use Fee for forestry and fire woods Fee for use of mineral resources of wide spread deposit MRAM Licence fee for exploitation and exploration of mineral resources Reimbursement of deposit, exploration which is carried by the budget fund Entitlement under Production Sharing Contract to Government Fee for recruiting foreign experts and workers Donation to Governmental organisations PAM LSWA Ministries, agencies and local government (aimags and soums) MOET 21 Consortium of Hart Nurse Ltd and Ulaanbaatar audit corporation

23 Mongolia 3rd EITI Reconciliation Report Covered Companies The 46 companies included in EITI Report were classified by their operations and activities as shown below ( Miscellaneous includes 24 mining companies and one oil company): 7 Gold 3 Coal 3 Silver 25 Ore Miscellanous 8 The 46 companies corresponding payments to Government of Mongolia were as follows for the tax year 2008: ,000100, , ,000200, , ,000999,999 1,000, ,999 5,000,0009,999,999 10,000,00049,999,999 50,000,000600,000,000 Consortium of Hart Nurse Ltd and Ulaanbaatar Audit Corporation Corporation

24 Payments were made to Governmental Organisations in 2008 by companies as shown below, expressed as a percentage of the total payments covered under EITI: Erdenet Mining Corporation Boroo Gold Tsairt Mineral Tavan tolgoi Other companies 83 From this diagram, it can be seen that Erdenet Mining Corporation is the largest paying company, by a large margin, and that the contribution from most of the 46 companies is relatively small. 23 Consortium of Hart Nurse Ltd and

25 5. RECONCILIATION OF FINANCIAL FLOWS 5.1 Aggregated financial flows reported initially Following an initial review of the templates submitted by Covered Entities, it became clear that many companies had included taxes such as VAT, PIT and other payments, which were not required for the exercise. In addition, one company Shijir Alt completed the templates in MNT rather than MNT 000 as requested. After excluding taxes which were reported but not required, and including Shijir Alt correctly as MNT, a comparison of the figures reported shows an initial net difference of (MNT 47,148,870 thousand). Section Government Entities As reported by Companies Net Differences MNT 000 MNT 000 MNT Taxes 513,176, ,354,346 (16,177,571) 5.2 Fees 117,144, ,715,936 (1,571,211) 5.3 Charge, service charges 2,434,776 2,918,513 (483,737) 5.4 Dividends on state and local property 27,349,905 21,133,422 6,216, Other payments to recipient governments - 26,669,948 (26,669,948) 5.6 Donations to Governmental organisations 1,048,225 10,364,538 (9,316,313) 5.7 Costs disbursed for protection of the environment 4,580,546 3,727, ,428 Total 665,734, ,883,821 (47,148,870) The table above shows the net resulting from a comparison of the returns from covered entities. Within this net figure, there were between reported payments and receipts as follows: MNT 000 Payments reported by companies which exceed the corresponding receipts reported by Government Entities (54,218,782) Receipts reported by Government Entities which exceed the corresponding payments reported by companies 7,069, Aggregated financial flows reported to the MEITI Working Group on 14 May 2010 Following much effort to reconcile the figures reported initially by the Covered Entities, including meetings with companies and government entities, we reported on progress to the MEITI Working Group on 14 th May Consortium of Hart Nurse Ltd and

26 At this stage, the unresolved discrepancies were as follows:- Section Initial Differences (net) Adjustments made Government Entities Companies Unresolved Differences (net) MNT 000 MNT 000 MNT 000 MNT Taxes (16,177,571) 571,368 (13,649,744) (1,956,459) 5.2 Fees (1,571,212) (14,244,097) (13,263,934) (2,551,375) 5.3 Charge, service charges (483,737) 52,050 (73,882) (357,805) 5.4 Dividends on state and local property 6,216,483-6,216, Other payments to recipient governments (26,669,948) 26,636,793 - (33,155) 5.6 Donations to Governmental organisations (9,316,313) 1,735,053 (3,948,674) (3,632,586) 5.7 Costs disbursed for protection of the 853,428 (3,636) 841,769 8,023 environment Total (47,148,870) 14,747,531 (23,877,983) (8,523,356) The table above shows the net resulting from a comparison of the returns from covered entities. Within this net figure, there were between reported payments and receipts as follows: Payments reported by companies which exceed the corresponding receipts reported by Government Entities Receipts reported by Government Entities which exceed the corresponding payments reported by companies MNT 000 (54,218,781) (8,531,380) 7,069,911 8, Aggregated financial flows after reconciliation and adjustment After the meeting with the MEITI Working Group, the MTA was asked to write to 27 of the companies requesting that they provide further information by 25 th May 2010 to explain the unresolved discrepancies between the figures they had reported and the figures reported by the government. We received additional information following this intervention, which we have incorporated into this report, taking account of any such additional information received by 27 th May Consortium of Hart Nurse Ltd and

27 A comparison of returns from Covered Entities as a result of our reconciliation work shows the following:- Adjustments made Section Initial Differences (net) Government Entities Companies Unresolved Differences (net) MNT 000 MNT 000 MNT 000 MNT Taxes (16,177,571) 821,835 (15,428,524) 72, Fees (1,571,212) (11,678,010) (13,172,267) (76,955) 5.3 Charges and service charges (483,737) 52,050 (74,897) (356,790) 5.4 Dividends on state and local property 6,216,483-6,216, Other payments to recipient governments (26,669,948) 26,669, Donations to governmental organisations (9,316,313) 4,893,179 (4,353,078) (70,056) 5.7 Expenditure for environmental protection 853,428 (1,540,781) (17,960) (669,394) Total (47,148,870) 19,218,221 (26,830,242) (1,100,407) The table above shows the net resulting from a comparison of the returns from covered entities. Within this net figure, there were between reported payments and receipts as follows: Payments reported by companies which exceed the corresponding receipts reported by Government Entities Receipts reported by Government Entities which exceed the corresponding payments reported by companies MNT 000 (54,218,781) (1,173,195) 7,069,911 72,788 A large part of the initial is related to donation amounts given to government organisations from the companies. The below table shows large increase of the reported donation amount by the companies compare to year It is due to companies number taken under reconciliation, since there were 38 companies in year 2007 while 46 in year Per government organisation Initial Per companies reportings reportings Year ,776,238 6,543,559 (4,767,321) Year ,048,225 10,364,538 (9,316,313) Difference (728,013) 3,820,979 4,548,992 Details of all adjustments made to amounts in the templates initially submitted as a result of the reconciliation exercise are shown in the Appendices, analysed by financial flow in Appendix A and analysed by company in Appendix B. The discrepancies remaining unresolved after the reconciliation are discussed further in Section 6 of this report. 26 Consortium of Hart Nurse Ltd and

28 6. UNRESOLVED DIFFERENCES 6.1 Aggregated unresolved After reconciling the figures, certain remain unresolved. These are discussed in detail in this section, by type of financial flow. A summary of the initial between receipts reported by Government Entities and companies, the adjustments made as a result of the reconciliation exercise, and the remaining unresolved net shows: Section Initial Differences (net) Government Entities Adjustments made Companies Unresolved Differences (net) MNT 000 MNT 000 MNT 000 MNT Taxes (16,177,571) 821,835 (15,428,524) 72,788 2 Fees (1,571,212) (11,678,010) (13,172,267) (76,955) 3 Charge, service charges (483,737) 52,050 (74,897) (356,790) 4 Dividends on state and local property 6,216,483-6,216,483-5 Other payments to recipient governments (26,669,948) 26,669, Donations to Governmental organisations (9,316,313) 4,893,179 (4,353,078) (70,056) 7 Costs disbursed for protection of the environment 853,428 (1,540,781) (17,960) (669,394) Total (47,148,870) 19,218,221 (26,830,242) (1,100,407) The table above shows the net resulting from a comparision of the returns from covered entities. Within this net figure, there were between reported payments and receipts as follows: Payments reported by companies which exceed the corresponding receipts reported by Government Entities Receipts reported by Government Entities which exceed the corresponding payments reported by companies MNT 000 (54,218,781) (1,173,195) 7,069,911 72, Consortium of Hart Nurse Ltd and

29 The total unresolved of MNT 1,100,407 shown above arise in the following companies: Companies Unresolved MNT 000 Company payments higher (net) than government receipts "Boroo gold" (1,140,161) Mongolrustvetmet (893,452) "Erdenet Mining Corporation" (130,440) Ivanhoe mines mongolia Ltd (126,811) Chinkhua MAK nariin sukhait (120,361) Bold tumur eruu gol (109,750) Other payments lower (net) than MNT thousand (163,837) Total ( ) Company payments lower than government receipts "Tsairt mineral" 1,435,782 Mongol gazar 101,747 Other payments lower (net) than MNT thousand 46,876 Total 1,584, Taxes The unresolved in respect of taxes mostly arose from customs tax, windfall tax and real estate tax. Companies with material are shown below: Companies Company payments higher (net) than government receipts Unresolved MNT 000 Baganuur JSC (8,436) "Shijir Talst" (679) Other payments lower than MNT350 thousand (644) Total (9,759) Company payments lower than government receipts Tavan tolgoi 50,105 Mongol gazar 19,029 Boroo gold 7,458 Ten khun 4,866 Other payments lower than MNT600 thousand 1,088 Total 82, Consortium of Hart Nurse Ltd and

30 Main reasons for the are as follow: Baganuur did not report the customs tax in the template initially submitted to the EITI; during the reconciliation, the company provided further detailed information and the relevant adjustments were made. However, there are still unresolved due to inconsistency of the reporting of the parties. In other words, the company reported the amount actually paid, whereas the government reported the amount of tax which is due to be imposed. Also the company has included customs service fee and payments to subcontractors under customs tax, and cannot provide separate information for the customs tax alone. The government reported receipts of MNT 50,105,000 from Tavan tolgoi ; however, the company has not reported at all. The difference was not resolved since the company has not provided with detailed information to prove the government figure. Mongol gazar didno initially submit the template to the EITI; during our reconciliation, further detailed information was provided after meeting with the company management. Per this detailed information, the company show customs paid amount of MNT 33,366,000 which is different from the MCO information by MNT 20,474,000, and it remains as an unresolved difference. Ten khun has not provided detailed information to support amounts reported as CIT paid, while the government has confirmed its figure with detailed information. Therefore, the amount MNT 3,248 remains still unresolved. Also, real estate tax amount of MNT 3,480,000 of the company remains unresolved even after adjustments based on the detailed information of the two parties. 6.3 Fees The unresolved difference in respect of fees results mostly from fee for exploitation of mineral resources ( Royalty fee ), licence fee for exploitation and exploration of mineral resources, land rent fee, fee for water use, fee for recruiting foreign experts and workers and fee for use of mineral resources of widespread deposit. Companies with material are shown below: Companies Unresolved MNT 000 Company payments higher (net) than government receipts Ten khun (34,440) Mongol gazar (17,152) Boroo gold (16,972) "Tsairt mineral" (10,492) Other payments lower than MNT3.250 thousand (5,796) Total (84,852) Company payments lower than government receipts Baganuur JSC 4,866 Shivee Ovoo 2,556 Other payments lower than MNT400 thousand 476 Total 7,898 Main reasons in respect of fee for exploitation of mineral resources ( Royalty fee ) are as follow: The Mongol gazar has reported MNT91,385,000 in its detailed information, the government has reported MNT71,752,000 in its detailed information, the difference of MNT19,633,000 remained unsolved. 29 Consortium of Hart Nurse Ltd and

31 Main reasons in respect of land rent fee and fees for water use are as follow: The government has not included in its reporting the payments made from the companies to local governments operating near the locations of the mining areas of the companies. In order to clarify these amounts we approached the respective local tax authorities and made any adjustments necessary. However, the amounts paid by Tsairt mineral, Erel and Ten Khun remain unresolved since these amounts could not be confirmed. Main reasons in respect of fee for recruiting foreign experts and workers are as follow Ten Khun has reported per its detailed information MNT 121,000,000 as paid, the government has reported MNT92,520,000 as received in its detailed information. We have made adjustments based on the both parties detailed information; however, MNT 28,480,000 remains unresolved. 6.4 Charges and service charges The unresolved difference in respect of charge and charges are resulted mostly from stamp and other charge for state registration paid to state and local administration in accordance with relevant law, service charges paid to state and local administration in accordance with relevant law and the custom service fee. Companies with material are shown below: Companies Unresolved MNT 000 Company payments higher (net) than government receipts Chinkhua MAK nariin sukhait (120,361) Ivanhoe mines mongolia Ltd (112,482) Mongolyn alt MAK (43,213) Boroo Gold (21,613) Jump (16,590) Zuriin bulan (10,900) Other payments lower than MNT thousand (33,326) Total (358,486) Company payments lower than government receipts Bold tumur eruu gol 1,267 Mongol gazar 429 Total 1,696 Main reasons in respect of stamp and other charge for state registration paid to state and local administration in accordance with relevant law are as follow: It was due to lack of detailed guidance in methodology of filling-up the Template No.1 on what types of charges to be maintained or included, and not clear information flow to consolidate to the government reporting. It is not reported in the government reporting due to not obvious seeing of the figures in the financial statements since the companies have reported charges and service charges as per their own classifications. In order to adjust the companies figures we have sent the confirmations letters to the local government organisations, however, the local government officials are not showing importance to reply to our letters, and the received replies are not satisfactory. Main reasons in respect of custom service fee are as follow: It was difficult for us to resolve the difference since the companies have reported VAT amounts paid to Customs Office, customs service charges at their lump-sum amounts. 30 Consortium of Hart Nurse Ltd and